Loan facility provided on the basis of Credit card Exempt or Taxable under GST? A landmark Judgement

Under GST Act Interest on loan is exempt from GST but Credit card services are chargeable to GST:

As per Notification No. 12/2017 (CT – Rate) – entry number 27 as below:

And Notification No. 09/2017 (IGST- Rate) – entry number 28

Now to understand the answer to question whether Interest on loan given to credit card holder is Exempt or Taxable under GST let’s take an Example:

Scenario: Imagine you have a credit card from “Bank X.” This bank offers a special loan scheme, let’s call it “Loan Plus,” exclusively to its credit cardholders. With Loan Plus, you can borrow money at a reasonable interest rate, and you have to repay it in monthly installments.

Question: Now, the question arises: Is this Loan Plus facility, which is available only to credit cardholders of Bank X, considered a “credit card service” that is subject to GST (Goods and Services Tax)?

Analysis: To understand this, let’s consider a few key points:

1. Exclusive Eligibility: Only credit cardholders of Bank X can access Loan Plus. This means having a credit card with Bank X is a condition for eligibility.
2. Separate Loan Agreement: When you decide to use Loan Plus, you enter into a separate agreement with the bank. This agreement outlines the loan amount, interest rate, and the Equated Monthly Installments (EMIs) you need to pay.
3. GST Implication: The issue here is whether Loan Plus should be considered a part of the credit card services, and thus, should it be subject to GST.

Example: Let’s say you have a credit card with Bank X, and you decide to use Loan Plus to borrow Rs. 50,000. The bank agrees, and you sign an agreement to repay this loan in 12 monthly installments, which includes both the principal amount, interest, and GST.

Now, you might argue that the Loan Plus facility and its interest are separate from the credit card services you receive. You believe that, according to the GST rules, this loan should not be taxed because it’s distinct from credit card services.

Let’s understand this very important case law in this regard:

👨‍⚖️ Calcutta High Court’s Verdict on Credit Card Loan & GST

Case Summary:

• 📅 Date: July 25, 2023
• 🔍 Case: Ramesh Kumar Patodia v. City Bank N.A. and Ors. [APO 10/2023 with WPO 547/2019]

Main Points:

• 🏦 Background: Mr. Ramesh Kumar Patodia, a credit card holder of City Bank, availed a special loan scheme for credit card holders.
• 📜 Agreement: Both parties had a separate agreement for the loan with fixed EMIs covering principal, interest, and GST and also loan was give through separate cheque.
• 🤔 Issue: Patodia argued that the loan and interest were separate from credit card services and shouldn’t be subject to GST.
• 💼 Bank’s Stand: The bank claimed that the loan was part of credit card services and subject to GST, as stated in their agreement.
• 🏛️ Government’s View: The Central Government contended that the loan to a credit card holder constituted credit card services and should be taxed.

Court’s Decision:

• 🧐 Observation: The court noted that a condition prohibited by law cannot be enforced.
• 📝 Loan vs. Card Service: Being a credit card holder was just an eligibility criterion for the loan; it was separate from card services.
• 🤝 Equal Treatment: Once the bank grants a loan to a credit card holder, it must treat it like any other loan, not a credit card service.
• 👍 Verdict: The loan transaction was a service exempt from GST under Notification No. 9/2017.

Outcome:

• 💰 Refund: The Bank and other Respondents were directed to refund the IGST paid by Mr. Patodia.

Conclusion:

• 🎉 Applaudable Judgment: The Calcutta High Court made a clear distinction between credit card services and loans.
• 📋 Advice to Card Holders: Check your credit card statements for GST charges on loan interest; mentioning loan repayment in the statement doesn’t make it a credit card service subject to GST.

So now you can easily understand whether Loan under credit card facility is taxable under GST or not.

Court’s Decision: In this scenario, the Calcutta High Court ruled that Loan Plus, despite being available only to credit cardholders, should not be considered a credit card service for GST purposes. Instead, it should be treated as a standard loan, which is exempt from GST.

So, the GST collected from individuals like you who used Loan Plus should be refunded because it was not applicable in the first place, according to the court’s decision.

This ruling makes it clear that even if a loan facility is exclusively offered to credit cardholders, it doesn’t automatically qualify as a credit card service for GST purposes, and the bank should not charge GST on it.

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